The Government intends to limit the ability to deduct interest to make residential properties a less attractive investment option and to help level the playing field for first home buyers.
The proposal is that, from 1 October 2021 (yes this October), interest will not be deductible for residential property acquired on or after 27 March 2021. For the properties acquired before 27 March 2021, generally investors’ ability to deduct interest will be phased out between 1 October 2021 and 31 March 2025. Some properties are excluded from these rules and some exemptions are proposed.
Below is a quick overview of the proposals. Please note these are set to be considered by Parliament so may change.
Phasing out interest deductions for properties acquired before 27 March 2021:
|Date interest incurred||Percentage of the interest that can be claimed.|
|1 April 2020 to 31 March 2021||100%|
|1 April 2021 to 30 September 2021||100%|
|1 October 2021 to 31 March 2022||75%|
|1 April 2022 to 31 March 2023||75%|
|1 April 2023 to 31 March 2024||50%|
|1 April 2024 to 31 March 2025||25%|
Acquired date for tax purposes
For tax purposes, a property is generally acquired on the date that a binding Sale and Purchase Agreement is entered into – even if some conditions still need to be met prior to settlement.
An investment could also qualify for phased-out deductions even if the property is acquired on, or after, 27 March 2021, provided the purchaser did so as a result of an irrevocable offer made on or before 23 March 2021.
Generally, any residential investment property in New Zealand that is suitable for people to live in long-term will be affected by these proposed changes. Typically, this would mean a house or an apartment, whether it is used for providing short-term or long-term accommodation.
There are exemptions, however. To minimise any impact on housing supply; property development and new builds will be exempt from the proposed rules.
Types of property to be excluded from the changes.
The main home is not affected by these proposals.
Commercial property unrelated to the provision of accommodation is not affected by the interest limitation proposal.
There are types of residential property that are proposed to be excluded from these rules are they are:
- Main home
- Certain Maori land, papakainga and kaumatua housing, and land transferred as part of a settlement under the Tiriti o Waitangi/Treaty of Waitangi
- Emergency, transitional, social and council housing
- Commercial Accommodation
- Care facilities
- Retirement villages
- Employee accommodation
- Student accommodation
- Land outside of New Zealand
Previously denied interest deductions may be available when residential property is sold if the sale is taxable, although the deduction may be limited to the gain of the sale. As you can see these proposed changes are complex and we strongly suggest you talk to us should you think that these proposed changes may affect you and your business. We deal with these types of amendments often and will guide you through the rules and proposals in plain English, so you are clear about the changes and how they could affect your business.